28.rho_no_short_sales

# 28.rho_no_short_sale - University of California Los Angeles Department of Statistics Statistics C183/C283 Instructor Nicolas Christou Constructing

This preview shows pages 1–2. Sign up to view the full content.

This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: University of California, Los Angeles Department of Statistics Statistics C183/C283 Instructor: Nicolas Christou Constructing the optimal portfolios - Constant correlation model Short sales not allowed The calculation of optimal portfolios is simplified by using the constant correlatation model to rank securities based on the excess return to standard deviation ratio. Excess return to standard deviation = ¯ R i- R f σ i . After stocks are ranked using the above ratio the optimum portfolio consists of investing in all stocks for which the excess return to beta is greater than the cut-off point C * . This cut-off point is computed as follows: C * = ρ 1- ρ + iρ i X j =1 ¯ R j- R f σ j where ¯ R j Expected return on stock j . R f Return on a riskless asset. σ j Standard deviation of the returns of stock j . ρ The correlation coefficient - it is constant for all pairs of stocks. To find C * we compute all C i ’s using portfolios that consist with the first ranked stock, the first and second...
View Full Document

## This note was uploaded on 06/02/2011 for the course STATS 183 taught by Professor Nicolas during the Spring '11 term at UCLA.

### Page1 / 2

28.rho_no_short_sale - University of California Los Angeles Department of Statistics Statistics C183/C283 Instructor Nicolas Christou Constructing

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document
Ask a homework question - tutors are online